The cost? "Hundreds of billions.'' The cost of not acting? Worse.

Posted September 20, 2008 7:00 AM

By Mark Silva

Capping a week of extraordinary government intervention in an economy in crisis, President Bush is at once supporting unparalleled federal action with hundreds of billions of taxpayer dollars at stake and attempting to offer Americans a sense of confidence that the economy can "weather'' this storm.

If the breadth and reach of emergency measures taken by the Bush administration and the Federal Reserve this week is unprecedented, the president insists that the economic challenges facing the nation are equally unrivaled.

For a president who watched months of job losses this year lead to a recent high in the unemployment rate, while maintaining that "our economy has got the fundamentals in place'' for robust growth, Bush has taken a sudden turn in allowing that, without dramatic action, the nation's financial system could "grind to a halt.''

"This is a pivotal moment for America's economy,'' President Bush said Friday, presenting a striking tableau on the steps of the Rose Garden, the president flanked by the chairman of the Federal Reserve, secretary of the Treasury and chairman of the Securities and Exchange Commission. "America's economy is facing unprecedented challenges, and we are responding with unprecedented action.''

While the White House acts to shore up shaken financial markets, the president is attempting to reassure Americans that their own bank savings are not at risk. Citing the Federal Deposit Insurance Corp. created after the Great Depression, Bush noted that in its 75 years of existence "no one has ever lost a penny on an insured deposit -- and this will not change.''

There appears to be recognition on Capitol Hill, too, that the government must take immediate and dramatic action within the next week and save the debate for who and what is to blame for the crisis for later - with the turmoil on Wall Street this week adding new urgency to Treasury Secretary Henry Paulson's long-standing call for an overhaul and streamlining of the federal regulatory structure for banking, insurance and the stock markets alike.

Yet Democrats and Republicans alike are voicing a certain reluctance about bailing out wayward Wall Street financiers at unlimited cost to taxpayers. Senate Majority Leader Harry Reid (D-Nev.) says they must "not only address the broader, underlying structural issues in the financial markets, but also protect taxpayers and strengthen the middle class.''

Paulson, a veteran of Wall Street investment banking, is spearheading far-reaching actions by the Treasury and calling on Congress for more. Paulson proposes that the federal government assume the burden of bad debts "weighing down our financial institutions and threatening our economy'' - authorizing the government to buy distressed mortgages at big discounts. Working through the weekend on detailed legislation, he the secretary will ask Congress to enact it next week.

At a news conference Friday, Paulson was asked the approximate cost of this government intervention. "We're talking hundreds of billions," he said. "This needs to be big enough to make a real difference and get at the heart of the problem.''

While the details of this "asset relief program'' remain to be worked out with wary congressional leaders, Paulson calls it cheaper than the alternative - "a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.''

And on Friday, Paulson announced creation of a temporary guaranty program for the money market mutual fund industry - long considered the safest of all investments. For a year, the Treasury will insure the holdings of any publicly offered money market mutual fund that pays a fee to participate. Bush has authorized Paulson to draw as much as $50 billion from an Exchange Stabilization Fund created after the Depression to guarantee that fund-holders can redeem their shares.

The Federal Reserve also injected another $20 billion in temporary reserves into the financial system and said it will buy short-term debt obligations issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

This follows recent moves by the government to take over operation and assume the liabilities of the mammoth home mortgage consortiums, Freddie Mae and Freddie Mac, and a spate of federal actions this week including the multibillion-dollar bailout of the insurance conglomerate American International Group and the infusion of billions of dollars by the Federal Reserve into the financial markets to spur lending.

Tracing the origins of the crisis at hand to "sub-prime'' mortgage foreclosures and tumbling home values with the bursting of a real estate bubble that inflated housing prices, Paulson maintains the financial system is clogged with bad mortgages.

These "mortgage assets...have lost value as the housing correction has proceeded,'' Paulson said, and they are "choking off the flow of credit that is so vitally important to our economy.

"When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.''

That image of an economy in need of a giant Roto-Rooter stands in stark contrast to the hopeful picture that the president attempted to paint of the economy earlier this year.

Addressing the money-market guarantees that the Treasury Department rolled out Friday, Bush said they "will help ease pressure on our financial markets. These measures will act as grease for the gears of our financial system, which were at risk of grinding to a halt.''

Much of what the White House is authorizing now would have been unthinkable under normal circumstances, with Republican leaders loath to interfere in the workings of financial markets that had thrived on deregulation in recent years.

"Our system of free enterprise rests on the conviction that the federal government should interfere in the marketplace only when necessary,'' Bush said Friday. "Given the precarious state of today's financial markets -- and their vital importance to the daily lives of the American people -- government intervention is not only warranted, it is essential.''

The urgency of the actions today underscores how much the White House has reassessed the fundamentals of the economy.
At a White House press conference on Feb. 28, Bush said: "Our economy has got the fundamentals in place for us to.... grow and continue growing more robustly, hopefully, than we're growing now. ''

At an April 29 press conference, Bush said acknowledged the "anxiety'' that Americans are feeling, asked if he has been wrong in refraining from calling the current cycle a recession. "The words on how to define the economy don't reflect the anxiety the American people feel. The average person doesn't really care what we call it; the average person wants to know whether or not we know that they're paying higher gasoline prices and that they're worried about staying in their homes.''

And at a July 15 press conference: "The bottom line is this: We're going through a tough time, but our economy has continued growing.''

Now, while wading through the many emergency actions which his administration has undertaken in the past several weeks, the president again is offering Americans some assurances that there is reason for confidence in the economy's future.

"In the long run, Americans have good reason to be confident in our economic strength,'' Bush said, citing crises confronted in the past several years - a "dot.com'' bubble burst, recession and the terrorist attacks of Sept. 15. " Our economy has weathered every one of these challenges, and still managed to grow...We will weather this challenge too.''

Comments

Now the Lehman employees are whining because they didn't get bailed out!? There are untold millions of former auto, steel, textile, and electronics industry workers they need to talk to.
I guess these geniuses also made the worst 401k mistake possible; Buying too much stock in your own bogus operation.

Now the Lehman employees are whining because they didn't get bailed out!? There are untold millions of former auto, steel, textile, and electronics industry workers they need to talk to.
I guess these geniuses also made the worst 401k mistake possible; Buying too much stock in your own bogus operation.

Excellent point. The financial industry - which is heavily invested in the Presidential race - is being bailed out at the expense of all other sectors of American business and, more importantly, the American business. When do the executives who reaped winfall profits over the last decade put some skin in the game?

Excellent point. The financial industry - which is heavily invested in the Presidential race - is being bailed out at the expense of all other sectors of American business and, more importantly, the American business. When do the executives who reaped windfall profits over the last decade put some skin in the game?

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Posted by: athena | September 20, 2008 11:06 AM
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Okay, I will. I think Duh'bya and Bernanke are acting like a bunch of socialists. They always have. Making the government a central point for distributing funds to industry or the financial sector is a principle of socialism. That's especially true where, as here, the government gets a controlling interest in those endeavors. Moreover, even apart from the events of this last week, Duh'bya has increased the government's role in socialist, welfare spending programs. So, yes indeed, the label does fit.
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Socialism: It's not just for poor people anymore.
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You can turn off your cricket machine now.

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Posted by: ornery | September 20, 2008 12:56 PM
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Ornery,
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You are not painting the whole picture. Hoover was nothing if he wasn't an interventionist. He did everything in his power to prop up labor and wages - the little guy - in the belief that poor consumer spending was at the base of then existing economic woes. His enemy was the stock market, which he accused of evil practices like speculation and short trading. He threatened it more than he supported it. The only thing he didn't do in the way of direct government intervention was to offer government loans to bail out banks. Then again, he didn't need to do that - because the Federal Reserve Bank (which is not technically a governmental agency) cranked up the money machine and pumped a lot of money into the market, increasing its deposits in member banks and further inflating the money supply. That was done in order to boost industrial production, thereby keeping workers on the job. The problem, of course, is that neither Hoover nor the FRB could really control the lending practices of the banks, especially the way banks handed out loans for investment. Then, as now, the temptation to make a profit overcame the good business judgment of bankers.
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The problem then, as now, is that too much government intervention occurred - if one includes the actions of the FRB. The massive influx of money propped up bad businesses and delayed the inevitable liquidation of bad debts. Without these corrections, asset values and rights remained undetermined and delayed; and that helped to keep the economy at a standstill. Thus, instead of ending the Great Depression, the government intervention made it last longer. These same forces are at work now. Both Duh'bya's plan and all known alternatives advocate the same kind of intervention. We should be concerned that all this intervention might just be throwing kerosene on the fire.

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